China’s Construction Boom Turning Into Ponzi Debt Disaster

In a great piece titled “Indebted Dragon“Lynette H. Ong provides some wonderful insight into the huge construction boom which has propelled the Chinese economy during the last few decades.  It appears the Chinese miracle growth story is coming unraveled as more and more farmers are being displaced to build all those fabulous (and mostly empty) developments.  As Ong points out, China’s construction craze has been the easiest way for various government officials to meet projected GDP growth targest and thereby keep their well-paid posts.  The local governments borrow money using the land as collateral and then repay interest on their loans using funds they earn from selling or leasing the same land.  Considering there were an estimated 64 million vacant properties last year, one can only assume the number is higher now.  This video tour of some of the vacant China projects is just a sample of the mal-investment driving China’s construction Ponzi scheme.  Ong highlights some the accounting tricks banks have used to keep the system functioning.  The whole debt-based system relies on ever-increasing property values, and prices on many of those empty properties are already looking unsustainable. I’ve talked to well-paid Chinese living here in the States, and many of them cannot afford the lofty prices on many of these overbuilt projects.  Sadly, most of the Chinese population cannot afford to buy or live in these newly-built residential construction projects.  It seems most of the construction in China is geared toward wealthy Chinese and speculators both of the domestic and foreign variety.

“The recklessness can be traced to two things: First, local Chinese officials are evaluated for promotions and other rewards based on how well the economy they manage performs. Construction and real estate activities are among the most straightforward ways to stimulate growth. White-elephant construction projects thus offer eager officials a perfect opportunity to impress their political superiors, even if massive developments do not necessarily make any economic sense. Take, for example, the city of Ordos in Inner Mongolia: Its elaborate urban infrastructure and its sea of new flats and office blocks are nearly all unoccupied, making it China’s largest ghost city.”

I’m sure this will end well.